Morgan Stanley Sees Euro Recession in 2013

Europe is proving to be the mess that cannot be cleaned up at least as rapidly as investors (and Europeans) had hoped. A macro research call from Morgan Stanley is now looking for the recession to continue into 2013 rather than just a stabilization, based mostly on a deterioration of the outlook in the core countries. While the report lowered expectations for the PIIGS and peripheral nations, a lower outlook in the core nations has to be a concern.

Morgan Stanley sees Europe contracting by 0.5% in gross domestic product, rather than the prior expectation that GDP would be flat in 2013. Its expectation is that Italy will contract by 1.2%, rather than the prior forecast of 1.0%. Spain is actually viewed as less bad because its outlook was revised to -1.5% rather than -2.2%.

There is a bit of seasonality here, and it may actually be an issue of a push-out on the recovery timeline because the firm expects the recession to get deeper in the winter (Q1) and last into the spring quarter (Q2), with that stabilization coming mid-year.

Another forecast is that the European Central Bank is expected to either cut rates in December or very early in 2013.

Elsewhere, Morgan Stanley kept its U.S. growth static at 1.4% for its 2013 expectation. Japan and the United Kingdom were each lowered by 0.2%, to 0.4% and 0.8% growth, respectively. Expectations for GDP in 2013 in China and India were ratcheted up marginally, while those for Brazil and Russia were lowered.